VITZROCELLLtd (KOSDAQ:082920) Could Be Struggling To Allocate Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think VITZROCELLLtd (KOSDAQ:082920) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for VITZROCELLLtd, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.10 = ₩18b ÷ (₩188b - ₩11b) (Based on the trailing twelve months to December 2020).

Thus, VITZROCELLLtd has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 6.8% generated by the Electrical industry.

View our latest analysis for VITZROCELLLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for VITZROCELLLtd's ROCE against it's prior returns. If you're interested in investigating VITZROCELLLtd's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is VITZROCELLLtd's ROCE Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 16% five years ago, while the business's capital employed increased by 116%. That being said, VITZROCELLLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence VITZROCELLLtd might not have received a full period of earnings contribution from it.

The Key Takeaway

In summary, we're somewhat concerned by VITZROCELLLtd's diminishing returns on increasing amounts of capital. However the stock has delivered a 80% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to continue researching VITZROCELLLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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